The Irish energy market is experiencing unprecedented change aimed at stimulating the growth of renewables. Ainsley Heffernan and David Gunn, Beauchamps’ energy and natural resources team, write.
The High Level Design for the Renewable Electricity Support Scheme (RESS) released by the Government on 24 July last brings Ireland into line with other countries by moving away from a fixed subsidy for renewable energy generators (under the existing REFIT scheme) to a competitive auction approach. Given that off-shore wind and solar will be supported for the first time, it is a big departure from REFIT which was dominated by on-shore wind.
RESS will help Ireland deliver its 2030 renewable electricity EU targets. It aims to diversify Ireland’s mix of renewable technologies which receive support, reduce the level of subsidy, promote community participation in renewable energy projects and ensure value for money for consumers.
Impact of RESS on the renewable energy industry
Some questions that stakeholders in the Irish energy industry will be asking are:
• Would technology-specific auctions have been preferable to technology neutral auctions? Despite the well-publicised drop in the cost of both solar PV and off-shore wind, they may not be ready to be price competitive in technology neutral auctions with on-shore wind, which has benefitted from subsidies since the 1990s
• Will the auctions’ intended aim of pushing down subsidy levels favour institutional investors with large portfolios over smaller developers?
• If the effective level of the subsidy is decreasing, how will this affect the value of existing wind farm projects, some of which will receive the fixed REFIT support until the end of 2032?
Technology-neutral vs technology-specific auctions
Off-shore wind and solar PV industry representatives were strongly supporting technology-specific auctions and several European countries have taken this approach. There is an argument that even if used for a limited period of time, it would better facilitate solar, off-shore and bio-energy in becoming more established in Ireland.
Germany has technology-specific auctions for certain tender volumes and the UK has off-shore wind in a different category to solar and on-shore wind. Each country has shown flexibility towards using technology specific and neutral auctions. It would be welcome if this was considered in the detailed design of the initial RESS auctions.
The Government’s reasons for technology neutral auctions include minimising costs to consumers and helping to meet Ireland’s EU RES-E obligations. To promote technological diversity, the Government will use interventionist levers, some of which include:
• targeted delivery dates (and penalties for default e.g. forfeit of bid bond, exclusion from subsequent auctions);
• placing a cap on single technologies at each auction (which is planned for the 2020 auction, RESS-2);
• increasing the capacity supply in an auction if prices submitted are lower than expected;
• variation in length of support per technology;
• setting budgetary caps per auction (which is set once capacity volume is agreed);
• setting administrative strike price per technology before the auction; and
• allocation of between 5 and 15 per cent for community-led projects at each auction.
The argument against technology-specific auctions is that capital costs for on-shore wind and solar PV have fallen significantly over the past five years and this trend is expected to continue for the next decade. The High Level Design Paper takes this view that RES-E Technology costs will continue to fall and converge throughout the duration of the scheme, meaning technology diversity will increase naturally as the scheme matures.
Reduced support levels
“The direction of travel clearly points to a subsidy-free future for renewable energy and developers and their funders will need to adapt to this new reality if they are to survive.”
The experience in other countries has seen auctions become increasingly competitive which has driven down the subsidy to generators over successive auctions. The direction of travel clearly points to a subsidy-free future for renewable energy and developers and their funders will need to adapt to this new reality if they are to survive. By way of example, the UK in its 2017 Clean Growth Strategy gave no indication that solar technology would be included, as it has started seeing investment into solar without subsidy backing. This is not too surprising as solar accounted for 57 per cent of worldwide renewables investment in 2017. Zero-subsidy bids have also recently been recorded for European off-shore wind projects. This could become a feature in Ireland in future years that the industry will need to adapt to.
RESS adopts a similar approach whereby all renewable technologies will be subject to a three-year viability gap look back analysis based on Levelised Cost of Energy, which is the international standard for comparing renewable technology costs. This analysis is designed to assess cost competitiveness and technologies which are no longer eligible for a subsidy will be excluded, while emerging technologies may be allowed participate at an auction if they become economically viable.
The conclusion we can draw from our European neighbours is that the use of technology-specific auctions can be useful for a period of time to facilitate technologies that are developing or competing for the first time against an established industry. Given that technology costs are falling, technology-specific auctions are unlikely to be necessary over the long or even medium term. The detailed design of the initial RESS auctions, the market’s response and the auctions’ ability to diversify the technology mix will be the real test of how successful the chosen approach has been.
More institutional investors and M&A deals
With subsidies likely to decrease in future years, this may indirectly give a competitive advantage to institutional investors over other developers. With increased risks and tighter margins on individual projects, institutional investors may benefit from economies of scale across a larger portfolio.
The secondary market for existing projects with legacy feed in tariffs schemes could also gain from the uncertainties caused by the new auction scheme. This could result in more M&A activity and interest in existing REFIT projects, particularly until the first RESS projects are commissioned.
Given the imminent changes with RESS and I-SEM, together with reducing technology costs helping to drive the growth of renewables, it promises to be an interesting time ahead. The recent announcements of several significant battery storage projects (which will be the first to operate on a commercial basis in Ireland) are also a positive development. In the longer-term storage, demand-side management and increased inter-connection will all be essential to accommodate greater levels of renewable electricity on the grid. One thing is for certain, the Irish energy market is undergoing a period of unprecedented change. As with all major industry changes, there will be both winners and losers.
For more information:
Ainsley Heffernan and David Gunn
Energy and natural resources team
T: +353 01 418 0600
E: firstname.lastname@example.org and email@example.com